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Legislative Democrats hint attacks on deduction for federal taxes

February 20, 2009

The good news: Iowa Legislative leaders are actually talking tax reform.

The bad news: it looks like they think "reform" means "increase."

Democrats in the Iowa Senate say they may push through a massive overhaul of the state's income tax system and junk the practice of allowing Iowans to deduct their federal tax bill from their income before calculating their state income taxes.
"Clearly federal deductibility is a gigantic benefit to the wealthiest Iowans and some mechanism that would move away from that, simplify our tax code and give a break to middle class families is something that we're very much interested in," Gronstal says.

The legislature's talk of "reform" would be more credible if it didn't conveniently come at a time when tax receipts are plummeting just as the state is in a middle of a spending spree. From Mr. Gronstal's statement, we're not talking about lowering the rates, broadening the base, and making things simple. He just wants to take breaks from some and give more breaks to others, with the state taking a cut to finance its binge.

Republicans are up in arms, seeing (I think correctly) a crude attempt to ram a tax increase through in the guise of reform.

Even so, Iowa's tax law is badly in need of reform. With dozens of special tax credits and breaks, and with the highest corporate rate and one of the highest individual tax rates in the country, Iowa's tax system is dysfunctional. Maybe this will cause the legislature to actually start to fix things.

State deductibility is at best a flawed way to protect against tax increases. Anybody who has practiced tax in Iowa for any length of time has seen people who have wasted their federal deductibility because they waited until the year after they had a big taxable gain to pay their taxes - wiping out their subsequent Iowa income and wasting much of the deduction that could have been used in the big income year. Far better to build the benefit into the rate structure so you don't have to pay a tax advisor to benefit from it. But by verifying fears that attempts to eliminate federal deductibility are just a ruse to raise taxes, Gronstal & Co. have probably set back the cause of Iowa tax reform for years.

Tags: Gronstal.iowa tax policy.O Kay Henderson.